Welcome to our Friday mailbag edition!

Every week, we receive some great questions and comments from your fellow readers on our recently published essays.

And this week was no different…

On readers’ minds this week were the investing habits and methods of our elected officials… the Fed’s interest rate hikes… and how potential conflict, like the situation in Ukraine, can play out in our portfolios…

Don’t forget, if you have any thoughts on anything I write here at Inside Wall Street, please be sure to pass them on to me at [email protected] I love reading your feedback and questions! I try to respond to as many as I can.

And as you can see below, often, your questions give me some great ideas for future essays! So keep them coming…

First up this week, our recent exposé of the investing habits of our elected officials in Congress certainly got the ink flowing (catch up here and here).

Here are some of the comments we received from readers…

Nomi, kudos for calling out the truth. I am personally acquainted with some of those on the list. They are far more despicable than pc-required commentary in a newsletter will allow. The Manhattan boys make ‘em look like angels, though, and that ain’t easy.

On a brighter note, LOVE your candor. Your market commentary is the most refreshing and candid many of us have seen in years. Keep on calling out the truth!

– David N.

Hi David, I so appreciate your thoughts about the muck that exists in the political hierarchy. Thanks for your kind words.

Rick Scott made his money as a business owner well before he was elected first as governor then as senator. The problem with a lot of our members of Congress is they get rich after they’re elected to office.

– Helga N.

Hi Helga, you hit on a great point. I agree that how politicians made their money before obtaining their public office is less important than what they did after reaching Washington, D.C.

Even more worrying than the fact they are making lots of money outside of their elected duties is what effect that has on their decision-making on the Hill.

As I wrote earlier this week, “These people are elected to act on our behalf. But they can’t help but have a strong allegiance to the corporations they invest in with their own portfolios.”

Nancy Pelosi’s husband made his fortune in real estate. Would be great to see her tax returns to see if they paid any taxes at all even after these capital gains.

– Ken M.

I would be curious how many and which members of Congress have personal or family foundations. Clearly that is how the bribes are paid.

– Michael F.

Hi Ken and Michael, thanks for your feedback and ideas! It certainly would be interesting to see Nancy Pelosi and her husband’s tax returns. In fact, over the years, they have both been reticent about showing them.

Michael, the connections to family charitable foundations is a great topic for a future essay. I’ll keep it in mind.

It won’t surprise you, meanwhile, that Nancy and Paul Pelosi have had a tax-exempt charitable foundation since 1992…

Moving on, my essay earlier this month about the Catch-22 the Federal Reserve finds itself in regarding interest rate hikes sparked this great question from Carlos…

Hi Nomi. Great piece. But I wonder… if the big banks are the shareholders of the Fed, wouldn’t they like there to be rate hikes since they’d make more money on interest rate increases? Banks do lend after all. Hope to hear your insights on this.

– Carlos S.

Hi Carlos, thank you. That’s an excellent question about banks and rates. The thing is, banks position themselves to gain on both sides of the rate level divide.

On the one hand, yes, if rates are higher, they make more money on the interest from extending loans and credit. That’s the prevailing story.

However, on the other hand, banks profit from their access to cheap money. They can leverage that in their trading activities. This is how many banks had record earnings in the last two quarters of 2020 and first three quarters of 2021.

And Gordian B. has an interesting take on the inflation issue, and the Fed’s response to it…

With all the labor shortages, many companies have started using robots to replace workers. There is an obvious cost saving in all of that.

When will all the productivity gains start to kick in and reduce inflation? As I understand it, productivity reduces inflation. Or am I wrong?

The Fed is known for doing the wrong thing! They will raise rates just as inflation begins to decline. Your thoughts? Thanks for your insights.

– Gordian B.

Thank you for your questions, Gordian. You’re right that if productivity and real economic growth (and even wage growth) kick in together, that reduces some inflation. That’s because they balance out the rise in prices that tends to precede that growth.

However, today’s inflation is not simply due to those factors. It is also caused by major disruptions in supply and supply transportation chains, which have jacked up certain prices. 

The Fed can’t really do anything about this latter situation. It doesn’t produce anything. And it has no control over supply or supply routes.

And yes, it’s generally behind the ball on its movements. But it has been a major driver of the distortion we see today between the markets and the real economy.

That’s because it over-fabricated trillions of dollars of money. It can’t walk back completely, without causing great harm to the markets. This is not something it wants to do, no matter what it says.

Next, it looks like the precarious situation over in Ukraine is giving readers cause to reflect on their portfolios…

Nomi, I don’t know if the Russia-Ukraine conflict will blow out into a war. But in case it happens, what should I buy? Stocks? Bonds? Commodities?

– Sarbelio J.

Hi Sarbelio, that’s an excellent question. At the moment, there are many factors besides the Russia-Ukraine conflict that all of those market areas are contending with. I covered these in my recent volatility piece.

However, to the extent we can isolate stock, bond, or commodity movement, particularly due to conflict, there is a general pattern.

Gold typically appreciates during rumors of such conflicts. Stocks retreat. Those roles flip as it becomes apparent that full-blown war won’t happen.

With respect to bonds today, they are more in the crosshairs of what the Federal Reserve is going to do. So it’s hard to determine whether they are also affected or their price movements are amplified due to this conflict.

In our current distorted environment, there are certain sectors of the market that will do well during the rumor and abatement of war possibilities.

I do think this issue is worth further research. I’ll dig into it in more detail and report back in a future essay.

And lastly for this week, this reader has a couple of great questions about a recommendation my colleague Lau Vegys made in his recent essay about silver

Hi, I have a couple of questions.

Why does Lau recommend SIVR, and not mention SLV, the biggest, most well-known ETF for silver?

Also, I just noticed that silver, the metal, went up .33% on February 11, but SLV and SIVR went up by 1.9% and 1.8% respectively. I thought they were supposed to track the silver price very closely. I can understand a small variance, but in this case, it’s like a 600% difference!

Wouldn’t these huge differences create major problems in the pricing? Can you please explain this to your readers? Many thanks!

– S. D.

I sent S.D.’s questions on to Lau. Here’s what he had to say in reply:

Strictly speaking, iShares Silver Trust (SLV) is not an exchange-traded fund (ETF). It’s structured (as its name indicates) as a trust. It is not subject to the same regulatory requirements as funds registered under the Investment Company Act of 1940.

Aberdeen Standard Physical Silver Shares ETF (SIVR), on the other hand, is indeed an ETF (which we were specifically looking at in this instance).

An ETF is just a simpler and more retail-friendly product. So, in this case, SIVR was an easier proposition.

Additionally, it has a lower expense ratio: 0.30% versus 0.50% for SLV. With fees that are 20 basis points lower than SLV’s offering, SIVR was also a less-expensive option.

Granted, SLV is a large fund with more trading volume. But that’s only important if you’re a high-frequency trader swinging in and out of trades on a short-term basis. I think it’s safe to say that this doesn’t fit the profile of most of our readers.

All that said, SLV may be an option worth looking into, depending on each person’s specific situation.

As for the second part of your question… while I’m not sure which silver pricing benchmark you were looking at, these things do happen. It’s true that a silver ETF tracks the silver price closely. This means that as silver prices rise or fall, the value of a silver ETF should also rise or fall to that extent.

But sometimes, an ETF may not accurately reflect the movement in underlying metal prices. This is known as tracking error, which is par for the course for any ETF product. But it rarely manifests beyond interim price movements.

That’s all for today! Thanks to everyone who wrote in.

If I didn’t get to your question this week, please write me at [email protected]. I’ll do my best to respond in a future Friday mailbag edition.

Happy investing… and have a fantastic weekend!

Regards,

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Nomi Prins
Editor, Inside Wall Street with Nomi Prins


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